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A 180-day deadline to crush ‘clunkers’ could deliver unintended consequences

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Chances are that when the federal government's "Cash for Clunkers" incentive program was implemented in the summer, questions of its impact on the scrap industry was pretty low on the administration's list of priorities.

The economy was on the rocks, General Motors and Chrysler were bankrupt and the government was looking for a practical, demand-driven initiative that would do something to get money flowing through the economy again.

With that aim in mind, the program was a huge success—so much so that its funding was exhausted well before the pent-up demand for new vehicles played itself out (even though a look at the success of similar initiatives in Europe might have provided a hint that there was plenty more upside than the administration originally thought).

Compare that to the impact—or lack of impact—that the wider economic stimulus program has had on the metals industry, an issue that AMM explored in depth in its October monthly publication. Only a small portion of the $787 billion in federal funds allocated under the stimulus package seems likely to trickle down to metals, and most of that won't begin to boost demand for steel-intensive projects until next year.

The longer-term success of "Cash for Clunkers" remains open to debate, too, with some critics suggesting that rather than creating new demand all it has done is encourage consumers to bring forward purchases of vehicles they would have made anyway, and in doing so has stored up problems for 2010.

But as a short-term fix, the Clunkers program boosted auto sales and lifted sentiment at auto producers and among steelmakers who supply them. Capability utilization rate crept above 60 percent in October for the first time in almost a year, and it's highly unlikely that rate would have done so if it hadn't been for the Clunkers-led impact on steel demand.

But what about scrap? Given that the junked vehicles are destined for dismantling, scrapyards might have been bracing for an influx of new supply. But it seems not to have worked out that way; the new sales generated by the incentive program might have provided a much-needed boost for the auto and steel industries, but few of the old vehicles showed up immediately at shredders.

Instead, dismantlers and auto recyclers seemed to have received the bulk of the clunkers, in part because they were able to offer auto dealers a better price (more than $200 per long ton vs. $150 to $180 per ton offered by shredders, as AMM chief secondary materials correspondent Michael Marley examines in Rush hour on the ferrous scrap freeway on page 26).

But while junked vehicles haven't exactly been piling up outside scrapyards, that doesn't mean the Clunkers program won't have an impact. Cars traded in under the program can only be kept for 180 days before being crushed, a deadline that auto recyclers are trying to have pushed back due to concerns of a big backlog building up as dismantlers struggle to deal with the influx of vehicles.

Shredders have a similar concern as auto recyclers rush to meet that deadline, the prospect is looming of a flood of new material reaching shredders just when it may be least needed. After staging a steady recovery through the summer, the ferrous scrap market began to soften in the fall as overseas demand tailed off and concerns mounted that domestic mills may have been getting ahead of the market as they brought capacity back on line.

If scrap demand doesn't improve, a big uptick in Clunkers-led supply could drive down scrap prices later in the winter. For a program that was designed to jump-start crucial parts of the economy to have exactly the opposite impact on the scrap market would be ironic, to say the least.

KEVIN FOSTER

Managing editor

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